The Nigerian Economic Summit Group (NEGS) has highlighted that the multiple exchange rates in Nigeria continue to erode the much-needed capital inflow, including foreign direct investment as the country’s exchange rate management exposes international investors to many risks.
This was disclosed in a report by the policy advocacy group on its website – A communique from the meeting of the Board of Directors of the Nigerian Economic Summit Group.
NESG stated that “the failure to address the currently prevailing condition of multiple exchange rates continues to reduce the much-needed flow of foreign investments and official diaspora remittances. Being savvy and rational, international investors will not invest where there is a real risk to their ability to access and repatriate investment proceeds or when the functional currency is in sporadic depreciation.”
Nigeria’s foreign exchange management since the beginning of 2022 has remained focused on maintaining the official Investors and Exporters (I&E) Window exchange rate artificially stable through foreign exchange restrictions and administrative measures. But the presence of multiple foreign exchange markets with wide premiums gives rise to speculations and round-trip trading which affects the efficiency of the foreign exchange market.
According to NESG, Multiple foreign exchange (FX) markets with significant price differentials create room for speculation, round-tripping, cronyism, and outright graft – with an attendant adverse effect on the economy. There is no better time to harmonize the FX rates than now.
In addition to the exchange rate management issues in Nigeria, the institution’s key public servant’s heated rhetoric and unrestrained statements continue to hamper capital inflow and investors’ confidence in the market. Considering the information-sensitive nature of the foreign exchange market, comments of the Apex Bank will trigger perceptions in people and investors, thereby making them take actions that can adversely affect the market.
What the World Bank is Saying
The World Bank, in the June Nigeria Development Update (NDU), stated that the favorable external conditions arising from oil prices reaching a 9-year high present an opportunity for Nigeria to adjust the exchange rate reflective of market dynamics. The international lender said,
“Clarity on exchange rate policy, and transparency in its management, are necessary to attract more significant capital inflows, including foreign direct investments.”
”Allowing further gradual adjustment in the IEFX rate, where the CBN manages the price, would help eliminate misalignment and alleviate persistent FX pressures.”
The World Bank believes that Nigeria’s exchange rate management is too rigid as it continues to fuel inflation and discourage investment.
According to Bode Agusto, a consultant on economics, finance, and business strategy who believes that pegging the naira to the US dollar, which is one of the ways of managing exchange rates, can only work for Nigeria if it earns a lot of dollars with little inflation differential with the United States. He noted Nigeria’s inability to sell USD at 420/1 to all those who want to buy it has led to the development of a parallel market that commands a large premium. He said “at 420/1, everyone wants to buy USD from the Central Bank of Nigeria (CBN) but no one wants to sell it. This means that a rate of 420/1 is below equilibrium and is unsustainable. Nigeria has tried several times in the past to peg the NGN to the USD and has failed every time.”
Bode recommended the adoption of a crawling peg currency management. This means that a country starts at a near market exchange rate and then allows its currency to depreciate (or appreciate) against the USD by close to the difference in annual inflation. “Today, this means starting at an NGN/USD exchange rate of around 600/1 and then allowing the currency to depreciate by around 10% per year. It also means allowing knowledgeable willing buyers to do business with knowledgeable willing sellers at contracted rates. The CBN may intervene in the market when rates are significantly higher or lower than its target. Kenya and Botswana have successfully managed their exchange rates for several years using this option,” he said.